Corporate Governance Rating in India

Topic: BusinessCompany
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Last updated: June 16, 2019

Sustainable growth and success of any country or society depend upon collective function of its resources, starting from the vast use of natural resources, strategic, geographic location, labour (people) and intellectual capital.

In a society where private participants have prominent role in utilization of all these resources, governance or public governance plays a vital role in sustainable development of the society. Governance, as it is said relates to decisions that define expectations, grant power or verify performance. It consists either of a separate process or of a specific part of management or leadership processes.Sometimes people set up a government to administer these processes and systems.

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1 Public governance is more complex but important in all kinds of society. It is involved in the most of the aspects of society, in one and another way. Relevance of public governance determines culture, quality of life, and sustainable development of society. A complete public governance system with all its strengths will help to build a great and potential culture and society. Like public governance, corporate governance is governance of affairs of a company by its stakeholders.As public governance is people’s democracy, corporate governance is stakeholders’ democracy.

Corporate governance looks at the complete governance of corporations from their very beginning in entrepreneurship, through their governance structures, legal framework, privatizations, to market exit and insolvency. The integrity of corporations, financial institutions and markets is particularly central to the health of our economics and their stability. Good governance creates a strong future for an organization by continuously steering towards a vision and making sure that day-to-day management is always lined up with the organization’s goals. **The basic objective of corporate governance (CG) in companies is to maximize shareholders’ value in the context of its corporate mission by considering a balance between goals and efficient use of resources. Long-run viability, more-efficient resource allocation and elimination of the uncertainties are the other primary benefits of corporate governance2 (Aras, 2008).

It can be defined as an approach of public responsibility to business management in order to strengthen the relationship of the society with the private corporate sector.This relationship had to be based on trust, ethical behaviour, moral values and confidence created by the transparency of real financial results, accountable and responsible business managers and members of the Board of Directors of corporations3 (Aysan, 2008). It is true that there can not be a single corporate governance model for each and every country as cultural differences are too great (Aras ; Crowther, 2008d) but good corporate governance should upheld four basic principles that are accepted and valid globally.These are equality, transparency, accountability and responsibility.

In line with these principles, corporate governance aims to protect the rights of all stakeholders (directors, board of directors, shareholders, corporate investors, foreign partners, employees, customers, competitors, suppliers, society and government) that have direct or indirect relations with the company (ICAEW, 2008a).One reason for the emergence of corporate governance is certainly the financial crises (1997 Asian Crisis, 1998 Russian Crisis) faced in I 990s and the consequent corporate scandals (Enron, Worldcom and Global Crossing in USA, Parmalat in Italy, Ahold in the Netherlands, Yanguangxia in China, Satyam Computers in India, etc. ) The insufficiency of corporate governance policies of public and private sector is one of the reasons behind these international financial crisis and corporate scandals.Corporate governance, however, should neither be viewed as mere policing against fraudulent practices nor would it be wise to consider it as an off-shoot of globalization and the consequent hyper-competition (Gregory, 2003), acceleration in international capital movement (OECD, 2004), increase in consolidation trend (acquisitions and mergers) due to privatization (Boubakri et. al, 2004) and the consequent increase in competition.

It should rather be instilled as a corporate culture a quest for better tomorrow and for which continuous nurturing, evaluation and up gradation and being compatible with the social, economic and political changes are some of the pre- requisites. Good governance creates a strong future for an organization by continuously steering towards a vision and making sure that day-to-day management is always lined up with the organization’s goals. It is basically an on going process. The external environment of the business organizations is changing day by day, and along with those changes the business should change it’s governance pattern.Corporate governance is thus not a one time exercise but rather an on going process. Regular evaluation and improvement are pre requisite to the success of the governance practices of any corporate entity.

Evaluation may both be of internal and external. When internal assessment of the prevailing corporate governance practices by the entity itself is obligatory for any company assessment of corporate governance practices by an expert external agency is a necessity. Evaluation of the practices by an expert external agency helps the entity to gauge its performance from an unbiased market point of view.Presently investors do consider corporate governance practices as a key decision-making criterion in investment decisions and in that process Society’s perception in regard to the governance practices of any company is very vital.

For an individual investor it is often not possible to assess the quality of the governance practices of a company and for that matter she has to depend on the CG Rating done by any expert external agency of repute as she always considers external auditor’s report for financial matters.Even if the rating is unsatisfactory stakeholders will benefit from the decreased risk of uncertainty and that in other way round will create an honest image of the company, after all honesty and integrity still carries some values. Corporate governance has become an increasingly popular term in India since late 1990s. Not only has India witnessed a transformation in the role of the private sector in economic development and job creation, but also corporate scandals, global competition, and various domestic and international efforts have made corporate governance a household name.However, till date few companies appear to truly appreciate the depth and complexity of this practice. It is often used as a public relations exercise rather than as an instrument to introduce the structures and process that enable the company to gain the trust and confidence of its stakeholders, reduces vulnerability to financial crises, and increase the company’s ability to access capital.

In India at present, external assessment of governance is in a very primary state.Only a handful firms have been ready to voluntarily subject their corporate governance practices to assessment by credit rating agencies. Of the 4,700 listed firms whose shares are traded in India, a mere 19 have made their corporate governance ratings public. The external assessment popularly known as CG ratings were first undertaken by CRISIL Ltd, an associate of global ratings agency Standard and Poor’s, in 2003 followed by two other ratings agencies, ICRA Ltd and Credit Analysis and Research Ltd, or CARE.Till date, the trio has rated around 50 firms, but only 19 have disclosed their ratings to the public; the others have preferred to keep them secret. Infosys Technologies Ltd has been rated by both ICRA and CRISIL and received the highest ratings from both the agencies. These ratings are voluntary and the companies have the right to accept or reject them.

“So far only a limited number of companies have approached us for corporate governance ratings,” said Anjan Ghosh, head, corporate ratings, ICRA, an associate of global rating agency Moody’s Investors Service.He added that ‘’Since it is voluntary only those firms that have a strong urge to improve their corporate governance or are sure about their governance standards approach the rating agencies. Firms don’t like to make public their ratings when the ratings do not match their expectations. ” Rajesh Mokashi, executive director of CARE said that “Only accepted ratings are made public and acceptance ratio is somewhat low,” The reluctance to provide investors with an independent evaluation of the way they are managed perhaps may be due to the fear of plight of capital, or loss of very personal interests (! of those who are at the helm of the affairs.

Unsatisfactory CG rating may for the time being cause plight of capital but in the course of time if the company improves its rating vis-a-vis it will get the plight in its favour. Besides in an environment when public trust is moving downward resistance to external rating may create a negative impact. The corporate governance rating by any external agency, however, may not be above question and such ratings hold potential to mislead investors.

But especially after Satyam fiasco it can be said that time has come for Indian Inc to answer how to make the corporate governance more transparent and accountable and also why not getting CGR awarded by an external agency would be mandatory. With the growing maturity and competitive imperatives, it should be possible to gradually reduce external interventions and increase self induced adherence to the best practices in the field. Till then, however, mechanism like external cg rating to ensure at least certain minimum standards is inevitable.BIBLIOGRAPHY •http://www. corpgov. net/ •http://www. rediff.

com/money/2009/jan/19satyam-what-india-must-do. htm •http://www. ifc. org/ifcext/CorporateGovernance.

nsf •http://phx. corporateir. net/phoenix. zhtml? c=146827&p=irol-govhighlights •http://www. rediff.

com/money/2009/jan/19satyam-what-india-must-do. htm •http://www. ecgi.

org •www. oecd. org •Corporate Governance Wikipedia Report.

•Business World.

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